By Keith Loria

One of the important financial choices that today’s homebuyers need to make is whether to apply for a 30-year or 15-year mortgage. In today’s housing market climate, industry experts say that now is one of the best times ever to apply for a 15-year mortgage, because rates are still historically low.

According to a late July analysis by Freddie Mac, there is currently a spread of 0.89 percent between the 15- and 30-year fixed rate mortgage benchmarks, which is the largest spread since Freddie started tracking the 15-year mortgage 20 years ago.

A 15-year mortgage is averaging around 3.66 compared to 4.55 for the 30-year mortgages. Even a 15-year fixed rate jumbo mortgage is much lower, coming in at 4.12 percent with no points, compared to 5.3 percent with points for a 30-year fixed rate (at press time).

“The main differences between 15- and 30-year loans are straightforward,” said Dan Green, a loan officer with Waterstone Mortgage in Laurel, Md. “They will have higher monthly payments, but you pay less interest, while 30-year terms have lower monthly payments, but you pay significantly more for the house in the long run.”

One of the reasons that people opt for a 30-year fixed mortgage is the tax benefit that you can get. 

“This is because the amortization schedule of 30-year fixed is back-heavy, with early-term payments big on interest and light in principal,” Green said. “By contrast, the 15-year fixed is always light on interest which lowers its taxpayer benefits.”

While it’s true that you do get more of a tax break from a 30-year loan, it shouldn’t be the main consideration when deciding on a term. The 30-year borrower will pay less in yearly taxes than the 15-year borrower, but that’s because the 30-year borrower is paying significantly more interest.

“On the surface, it makes sense. All things being equal, a 15-year mortgage allows you to pay off your mortgage twice as fast while saving a significant chunk of money on interest,” said Mark Crosby, a mortgage expert based in Wilmington, Del. “That being said, I still think the 30-year mortgage is a more logical choice for most people because it has so many more advantages over its shorter-termed cousin.”

One of those reasons is mortgage payments are much less expensive each month and having a smaller mortgage payment reduces the pain of reaching other short-term financial goals.

Of course, you can still pay off your loan quicker without having to be locked into anything, even if you will be paying almost a point more.

“With a 30-year mortgage you are almost always free to make additional principal payments necessary to pay off your loan in 15 years without penalty,” Crosby said. “However, you are never obligated to do so, and can always change your mind as life’s circumstances dictate. With the 15-year loan, you are hopelessly committed to giving that extra money to your lender each month, whether you can really afford to at the time or not.”

Green said the higher payments that come with a 15-year mortgage make little sense if it leaves you unable to build an emergency savings account, or contribute anything to your 401(k) plan, IRA, and perhaps your kids’ college funds.

“By committing to give your lender that additional principal each month you could be needlessly tying up too much of your money into your house,” he said. “While it’s true that the shorter loan builds home equity faster, you still need a lender’s permission to tap into it with a home equity loan.”

Still, if you have the financial flexibility to make the payments, the amount of interest saved over the life of a 15-year mortgage will be substantial and it’s the perfect time to take advantage of them.

For more information about today’s mortgage options, contact our office today. Please contact William "Bill" Price with any of your Frederick Maryland real estate or mortgage questions toll Free, 24/7, at 1-800-395-9636 x7 or E-mail at bill@homes2price.com. My Office number at Real Estate Teams, LLC is 301-695-3020 x2793

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